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How Proposed Changes to CPP Could Affect You

Yesterday, the Canadian federal and provincial governments gathered at Meech Lake to discuss the possibility of a Canada Pension Plan expansion. However, with looming U.S. fiscal cliff worries, and our nation’s budgets remaining in the red for years to come, the feds are balking at the proposal. They say a far better and less costly solution is Pooled Registered Pension Plans (PRPPs), a voluntary savings vehicle for employees without defined benefit pension plans, which guarantee employees monthly pension in retirement. The provinces, including Ontario aren’t so keen on PRPPs, and are throwing their support behind a CPP expansion.

The Looming Pension Crisis

The days of guaranteed monthly pensions in the private sector are numbered. Today 60 per cent of Canadians don’t have any pension plan at work. For the lucky few that still have a pension, employers are increasingly switching from defined benefits to defined contribution plans. This shifts the burden of risk from the employers to employees, since employees’ pensions are based solely on investment performance.

Proposal to Increase Government-Provided Payouts

The Canada Pension Plan Retirement Pension is a national program that provides a monthly taxable benefit to retired contributors. If you’ve worked, made at least one contribution and you’re at least 60 years old, you qualify.

Ontario is leading the charge on CPP expansion, with rate hikes proposed as early as 2014. Alberta, Canada’s economic engine, is less supportive. The feds have made it clear that two-thirds of the provinces would have to agree on CPP expansion before they would even consider it. The provinces and political parties are all over the map in terms of CPP expansion – New Democrats and the Canadian Labour Congress would like to see CPP doubled. CPP premium increases could increase anywhere from 10 per cent to 50 per cent and the Year’s Maximum Pension Earnings (the maximum earnings amount in which contributions to the Canada Pension Plan can be made) could see up to an increase of 50 per cent.

What Does this Mean for the Average Working Canadian?

With the eligibility age of Old Age Security (OAS) recently bumped up from 65 to 67, life expectancy increasing and the scarcity of workplace pensions, employees are now faced with an increased burden of saving for their retirement. CPP expansion would lift some of that burden of the shoulders of workers – although CPP premiums would increase, it would come right off employees’ pay cheques before they had the opportunity to spend it. Employees would in turn receive a greater guaranteed monthly pension in retirement in the form of CPP. Don’t hold your breath – CPP expansion was hotly debated in 2010 with no consensus reached.

Additional Changes to the Canada Pension Plan

As previously mentioned, all Canadians over the age of 60 who’ve made at least one contribution qualify for CPP. However, unlike OAS which is phasing in automatic enrolment, you’ll need to apply to start receiving it. CPP has undergone a number of changes recently – you no longer need to stop working to receive CPP, although you’ll still be required to pay CPP premiums up to age 65 (after that it’s voluntary). If you start your CPP earlier than age 65, your pension will be reduced.

To encourage Canadians to stay in the workforce longer, increased early retirement reductions are being phased in – they will gradually increase from 0.5 per cent per month to 0.6 percent per month by 2016 – that’s a 36 per cent reduction in CPP if you take it as early as age 60. If you wait until age 70 your CPP will be boosted by 42 per cent. Your CPP entitlement depends on the average earnings over your career (although 16 per cent of your lowest earning years are automatically ignored). The maximum CPP amount is adjusted annually in January based on the Consumer Price Index (CPI). The maximum CPP in 2013 is $1,012.50, although in the average is far less – only $528.49. Payments are received monthly via direct deposit.